Is the Federal Reserve overreaching by broadening the scope of its policies?

If extremism in the defense of liberty is (reportedly) no vice, unremitting, continuous undisciplined chatter for the sake of transparency is no virtue.  God knows transparency has become the sine qua non of public ethics these days.  To be accused of not being transparent is pretty much the same thing as being accused of being an anti-Semite (with notable exceptions for certain parts of the world).  When it was reported recently that Mrs. Clinton had used a private email address as opposed to an official State Department email, someone suggested that this evidenced a lack of transparency.  The democratic establishment shuddered, only matched by the glee over at Fox News.

But dear Lord, aren’t there some thoughts better left unuttered?  The Fed is beginning to sound like the Speakers’ Corner at Hyde Park.  Chairperson Yellen keeps giving speeches and the various governors and members of the Federal Open Market Committee are panting after 5 minutes on CNBC.  And they are all telling us what they think.  And, increasingly, what they think is often tangential to what we, the public, hired them to do.  If this is transparency, is it actually helpful?

This orgy of transparency is making it pretty obvious that the Fed-heads seem to be wandering off the pitch a good deal lately.  What’s with Chairperson Yellen talking about income inequality in America?  Did a third target slip into the Fed mandate while we weren’t looking?  More recently, she jumped on the “bankers are bad” bandwagon and asserted, in relatively intemperate tones, that bankers (in what she readily admitted was broad generalization) engaged in fraud and criminal mischief as a common place.  Really?  What’s the point of trashing the banking community in such obscurant generality in a public forum?  Is there a genetic disposition among the financially inclined to malfeasance? Are bankers worse than auto executives or chemical makers or, God help us, oil company executives?  Look, I know I’m talking my book and many of my friends are bankers, but I have seen precious little evidence of this rampant criminality or reckless disregard for the law that characterized the Chairperson’s speech.  Look at some of the things Chairperson Yellen has recently said:

  • “I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history, among them the high value Americans have traditionally placed on equality of opportunity.” – Janet Yellen, Conference on Economic Opportunity and Inequality
  • “Too often in recent years, bankers at large institutions have not [acted in an ethical manner], sometimes brazenly.” – Janet Yellen, Citizens Budget Commission
  • “There may be pervasive shortcomings in the values of large financial firms that might undermine their safety and soundness.” – Janet Yellen, Citizens Budget Commission

The Fed has responsibility for safety and soundness in its spare time, so arguably there’s some relevance to the bank-bashing, but those speeches struck me more as a political speech motivated by ideology than expression of the Fed’s concern for safety and soundness.

Has the Fed become a partisan of the progressive wing of the White House?  Is this mission creep?  Is it an effort to burnish the reputation of the Fed in certain policy circles that have better parties and get “liked” more by Hollywood’s glitterati?

The officials of the United States Federal Reserve should not be talking in this undisciplined way.  They can’t help but be heard to speak ex cathedra.  A Governor of the New York Fed is not just a citizen and is not entitled to muse about things of national political importance based on his or her own gut political inclination.

My point here is neither to defend bankers nor to champion the cause of income inequality, but when senior Fed personnel take on such issues outside of the Fed’s remit, it suggests that Fed policy makers are looking at larger and broader political issues in setting policy and not focusing, as they have done, and should do, on their statutory twin goals of price stability and full employment.

Look, it’s not that these other issues are illegitimate concern for someone in our government and polity; it’s just not the Fed’s job and this fuzzy thinking matters.

As time goes on and news becomes history, it’s always been apparent that the Fed’s job is a tough stop and getting monetary policy right is really hard.  Figuring out where the economy has been and where it’s going and what steps should be taken to preserve price stability and full employment is a fraught undertaking at best, and we don’t expect – at least we shouldn’t expect – the Fed to get it right all the time.  And getting it right has always been measured against very discrete and limited goal posts.  But when other factors are added to the mix and the Fed attempts to respond to a broader and largely undefined set of political goals such that its policy seems now to be “do good,” the policy outputs will, of necessity, become more randomized.

Even if markets struggle to understand what the Fed is trying to do, at least we have, until recently, had a pretty good idea of what it was shooting for and market participants can take a view on what monetary conditions ought to be like as the Fed pursues policies designed to achieve well defined goals.  If we don’t know the finish line, we have no chance to figure out what the Fed will do and that’s the threshold of monetary policy chaos.

Chaotic monetary policy leads, to be generous, to important inefficiencies. Markets that are inefficient do not perform well and do not provide the best-in-class monetary infrastructure to help the US economy grow and thrive.  This needs to stop.